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In this article we will discuss about the Strategy of Indian Government on Infrastructure Development and PPP. After reading this article you will learn about: 1. Introduction to Government’s Strategy on Infrastructure Development and PPP 2. Public-Private Partnerships (PPP) in Infrastructure Development and Others.
Introduction to Government’s Strategy on Infrastructure Development and PPP:
In view of its huge importance, potential and problems of infrastructure development, there is an urgent need on the part of the Government to adopt an appropriate strategy for the sector. Infrastructure, being an important element of development immediate steps must be taken by the Government to develop all sorts of infrastructural facilities in the country simultaneously.
Considering the constraints on the part of the public sector to play alone in this critical sector, the private sector will have to play a growing role in additional capacity creation in future. The public sector will also continue to shoulder the major burden of providing critical infrastructural services.
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The Government is also of the view that credible public sector reforms are necessary to broad-base their management, to upgrade their technology, to improve their performance and quality of services and to generate adequate investible resources through rationalisation of service charges and better recovery of cost.
In this connection, the Economic Survey 1996-97 observed, “the process of deregulation and privatisation of infrastructure services also needs to be supplemented by the establishment of statutory regulatory authorities for ensuring fair competition among public and private operators, and protecting consumer interests, public safety, internal and external security, needs of vulnerable and weaker sections and environmental sustainability.”
Public-Private Partnerships (PPP) in Infrastructure Development:
Infrastructure projects have long gestation period and, in most cases, are not financially viable on their own. It may not be possible to fund the very large investment requirements of these projects fully from the budgetary resources of the Government of India alone.
In order to remove this shortcoming and to bring in private sector resources and techno-managerial efficiencies, the Government is now promoting Public-Private Partnerships (PPP) in infrastructure development through a special facility envisaging support to PPP projects through ‘Viability gap funding’.
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Primarily this facility is meant to reduce capital cost of the projects by credit enhancement, and to make them viable and attractive for private investments through supplementary grant funding. Provisions for this facility is made on an year to year basis.
The implementing agency must be selected through a transparent and open competitive process. The main criterion for selection will be the extent of viability gap funding required by the private partner to successfully implement the project.
Thus, in recent years, the Government is making a move for introducing public-private partnership for undertaking projects for infrastructural development of the country.
As a part of Centre’s efforts to attract huge amounts of investment in critical infrastructure projects over the next five to seven years, the Finance Ministry has made a plan to ‘Operationalize’ the viability gap funding process for private-public partnerships (PPP). The funds kept aside for the next seven years are about Rs 14,000 crore.
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The Centre has accepted that improving infrastructure is the key to development and the necessary investment during the Tenth Plan period is likely to be Rs 4,000 billion, excluding urban infrastructure. Since the government does not have the money, resources will have to come from the private sector. In exchange, the private firms can use user charges on infrastructure services. They can be given tax holidays.
The PPP option seems to be a viable one to build infrastructure but as these projects take a while to develop, they may not be fully financially viable. In order to reduce their project costs, the Centre has the Viability Gap Funding facility. Funds have been kept aside in the Current Budget for “assistance to infrastructure development.”
In order to be eligible for funding, a project must have 49 per cent private equity and it could be in areas such as ports, roads, railways, airports, power projects, building of international convention centres and solid’ waste disposal centres and sewage plants. The budget (2005-06) has made a provision for Rs 1,500 crore for viability gap funding for infrastructure projects.
As per guidelines, the total government expenditure on the project should not be more than 20 per cent. The funding can be a capital grant, loans or an interest subsidy and such fund will be paid by the Government provided certain targets are met. If the funding is to be within Rs 50 crore, the empowered committee of officers can clear it.
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If it is more than that, the clearance of Finance Ministry is necessary. While Rs 2,000 crore is being allotted for the remaining two years of the Tenth Plan, Rs 10,000 crore is being kept aside for the Eleventh Plan period. But the success of the scheme will be reviewed three years after it is cleared.
Special Purpose Vehicle (SPV):
Moreover, the current budget (2005-06) has proposed for a “Special Purpose Vehicle” (SPV) for financing large road, ports, airports and tourism projects through which Rs 10,000 crore could be borrowed from country’s foreign exchange reserves during the year 2005-06 in order to finance necessary imports for large projects and also through borrowed funds from banks.
The projects would be appraised by an Inter-Institutional Group of Banks and financial institutions. The SPV will lend funds, especially debt of longer term maturity, directly eligible projects to supplement other loans from banks and other financial institutions.
Taking cognizance of the advantages that PPP offers in terms of cost saving, access to specialised expertise and proprietary technology, sharing of risks with the private sector and the ability to take up a larger shelf of infrastructure investments, Government of India is actively encouraging the PPP projects with whole heated support.
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In order to expedite the PPP projects in the central sector, the need for streaming the appraisal process was felt and accordingly an appraisal mechanism has been notified including the setting up of the PPP Appraisal Committee that will be responsible for the appraisal of PPP projects in the central sector.
In order to accelerate and increase PPPs in infrastructure, two major initiatives have been taken by the government in recent years.
These initiatives are:
(a) Provision of viability gaps funding and
(b) Setting up of a SPV, India Infrastructure Finance Company Limited (IIFCL) so as to meet the long term financing requirements of potential investors.
The viability gap funding will normally be in the form of a capital grant at the stage of project construction, not exceeding 20 per cent of total project cost. In order to be eligible for funding under the viability gap support scheme, the PPP must be implemented by an entity with at least 51 per cent private equity.
Although a provision of Rs 1,500 crore for ‘viability gap’ funding for infrastructure projects was made in the budget (2005-06), projects are get to be sanctioned under the scheme. In the mean time the operationalization of IIFCL is underway.
India Infrastructure Finance Company Limited (IIFCL):
IIFCL was incorporated on January 5, 2006 with a paid up capital of Rs 10 crore and an authorized capital of Rs 1,000 crore. Apart from its equity, IIFCL will be funded through long term debt raised from the open market.
To enable the company to do so, the Government may extend a guarantee for repayment of principal and interest. The extent of guarantee provided by the Government of India in the first year of operations is expected at around Rs 10,000 crore.
It was observed that there were many infrastructure projects which were financially viable but, in the current situation, faced difficulties in raising resources. It was proposed that such projects in specified sectors roads, ports, airports and tourism be funded through a financial SPV.
In that case, the SPV would lend funds, especially debt of longer term maturity, directly to the eligible projects to supplement other loans from banks and financial institutions. Government will communicate the borrowing limit to the SPV at the beginning of each fiscal year. For 2005-06, the borrowing limit was fixed at Rs 10,000 crore.
IIFCL is a SPV created company. It would render which would render financial assistance through:
(a) Direct lending to eligible projects;
(b) Refinance to banks and financial institutions (FIs) for loans with tenor of five years or more; and
(c) Any other method approved by the Government.
The loan assistance from SPV shall not exceed 20 per cent of project cost. A project awarded to a private sector company for development, financing, construction through PPP shall have overriding priority under the scheme. Private sector companies will not be eligible for direct leading but may of for refinancing option.
The rate of interest charged by IIFCL shall be such as to cover all fund costs including guarantee fee as well as administrative cost.
However, IIFCL is expected to be a very lean organisation which would keep overheads to the minimum and thus keep the cost of funds for infrastructure at a competitive level. The company would fill the gap for long term infrastructure finance which the banks are not actually in a position to address owing to concerns relating to mismatches is assets and liabilities.
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